Asian stocks at two-week lows as bond woes spread, dollar slips

By Saikat Chatterjee

HONG KONG (Reuters) - A selloff in global sovereign bonds pushed Asian stocks to two-week lows on Wednesday as investors worried it might trigger profit-taking in other asset classes, while the U.S. dollar stayed on the backfoot dogged by trade deficit concerns.

In Europe, financial spreadbetters expected benchmark indices to open 0.3 to 0.5 percent higher.

Bonds have been among the best performing asset classes in recent years thanks to the unconventional policy easing steps taken by global central banks, but signs are emerging that investors are tired of chasing ever-shrinking yields.

As bond yields rose sharply from Germany to Australia in recent days, stock markets began to flounder.

A key index of Asian shares has fallen 3 percent after hitting a more than seven-year high on April 29. On Wednesday, MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) fell 0.8 percent, while Australian stocks ended down 2.3 percent (AXJO).

Market participants struggled to make sense of the simultaneous selloff in eurozone and U.S. debt markets and global equities, alongside the rise in commodities.

The churn appeared to have been sparked by the persistent rise in German bund yields , driven by worries over a Greece debt default and excessively long positions in European debt.

"The current selloff in bonds appears to have been led by developments in the Eurozone markets," said Ashish Agrawal, an emerging markets strategist at Credit Suisse (SIX:CSGN) in Singapore.

But he also went on to note that monetary policies have generally become more supportive of growth, which could help other asset classes escape the bearish influence of bonds.

"If growth prospects stay intact, it will be too early to conclude that this weakness in bonds will have an impact on other asset classes such as equities," Agrawal said.

For now, a two-week selloff in German Bunds, alongside Treasuries and British Gilts, has led to worries about eurozone monetary conditions and a possibly volatile unwinding of both short positions in the euro and investments in eurozone equities.

In just four sessions, yields on 10-year German paper (DE10YT=RR) had tripled to 0.517 percent and erased all the gains made this year. On Tuesday alone, Italian, Spanish and Portuguese yields all rose between 27 and 30 basis points.

The U.S. 10-year Treasury yield (US10YT=RR) touched a two-month top at 2.20 percent, having climbed from 1.92 percent in little more than a week.

And the front end of the Australian bond curve has surged higher with three-year bond yields (AU10YT=RR) up by more nearly half a percent in the last three weeks.

MIXED BAG

With bond yields surging higher, profit-taking on equities emerged with some market darlings such as Indian shares (NSEI) having fallen nearly 9 percent since early March.

The Dow (DJI) ended Tuesday down 0.79 percent, while the S&P 500 (SPX) lost 1.18 percent, and the Nasdaq (IXIC) 1.55 percent. The pan-European FTSEurofirst 300 (FTEU3) equity index shed 1.6 percent.

A broad bounce in commodities saw oil and copper prices rise to their highest levels so far this year.

Brent crude has climbed almost 50 percent from its January trough to reach $68.28 a barrel, with U.S. crude not far behind at $61.41.

In currencies, the U.S. dollar was less lucky as an unexpectedly sharp widening in the U.S. trade deficit suggested the economy may have shrunk in the first quarter. [TOP/CEN]

The dollar index (DXY) fell as far as 94.877, retreating from a one-week high of 95.946. It last stood at 94.82.

Against the yen, the greenback eased to 119.94 from a 3-1/2 week high of 120.51. The euro rebounded to $1.1214 , from Tuesday's low of $1.1066.

Later in the day, Federal Reserve Chair Janet Yellen is scheduled to speak and markets will be super sensitive to any guidance on the outlook for the first hike in interest rates.